Despite Last Night's Cheering, the Challenges for Labour Remain

There have on occasion been fairer winds blowing in the opposition's sails going into a set of local elections. Take, for instance, 2006 when the weeks before polling were dominated by revelations of the deputy prime minister's affair with his secretary, the health secretary being booed by nurses, and the home secretary admitting that hundreds of foreign prisoners had been released from UK jails with no consideration of deportation. Or 2009, when the minister responsible for local government quit the government less than 24 hours before the polls opened.

Nonetheless, after a month of headlines about taxes slapped on pasties and grannies and slashed for millionaires; secret backchannels with Rupert Murdoch's News Corporation and cosy dinners at No 10 for millionaire donors; all topped off with the news that George Osborne's stewardship of the economy had driven it back into recession, it is difficult to think of how the Tories could have contrived more to help their opponents in the run-up to polling day.

In an ideal world, of course, councillors would stand or fall on their records and local issues would determine who controls the town hall. And, indeed, many people do cast their votes on this basis. Ken Livingstone's struggle to win back City Hall at a time when Labour support in the capital is surging proves the point. But there is no escaping the fact that many voters, national politicians and the media view local elections as little more than mini-referendums on the performance of the national government.

None of that, of course, should detract from Labour's achievements yesterday. With an estimated 8% lead in the national share of the vote, the party may not yet be clocking up the kind of popular vote leads that it did under Neil Kinnock in 1990, Tony Blair in 1995, or, indeed, the Conservatives achieved under David Cameron in 2008. However, 39% is a solid 10% rise on Labour's general election score of 2010, and a further rise - this time at the expense of the Tories - on the 36% it polled in last year's local government elections.

While the results of the London mayoralty and Glasgow city council elections are still awaited, Labour can celebrate ejecting the Conservative-Liberal Democrat coalition which has controlled Birmingham for the last eight years and looks on course to pick up over 700 seats nationwide.

More crucially, by winning control of councils like Exeter, Southampton, Plymouth, Thurrock, Harlow, Norwich and Great Yarmouth, Labour has begun to re-establish a foothold in those parts of the south, south-west and eastern England where it desperately needs to be winning seats at the next general election. In Wales, the Conservatives lost control of Monmouthshire and Vale of Glamorgan councils. Indeed, Labour appears to be performing very well against the Tories in places like Crawley, Dudley, Swindon, Cardiff and Milton Keynes, all authorities containing crucial marginals.

Thus the local election results also bear out the opinion polls' suggestion that the political dynamic since the last general election - Conservative support static, with Labour edging ahead as the Liberal Democrat vote collapses - may be changing. For the first time since David Cameron entered No 10, Conservative support has slipped significantly below the 37% the party polled in May 2010. Tory voters' satisfaction with the way the government is running the country has dropped 16 points from 66% to 50% in the six weeks since George Osborne delivered his budget. Moreover, as YouGov's Peter Kellner has noted, the collapse in the prime minister's approval ratings - from minus five on the eve of the budget to minus 31 at the start of May - is comparable with that of Gordon Brown when he backed out of calling a general election in autumn 2007.

But while Labour's results look a good deal more impressive than last year, when the party scored big gains in its northern urban heartlands but put in a rather more patchy performance in the critical industrial, new, and commuter towns of the south and Midlands, two important notes of caution need to be sounded.

First, and self-evidently, big gains in midterm local election are not necessarily a good guide to how, on a higher turnout and with a choice between two alternate governments at stake, people will go on to vote in a subsequent general election. The local elections held two years after general elections on the last two occasions when there was a change of government are illustrative. In 1981, two years after losing office and with Michael Foot facing his first test as leader, Labour gained 988 seats, with the Tories losing 1,193. In 1999, William Hague's Tories gained 1,348 seats and Labour lost 1,150 seats.

The political landscape in 1981 and 1999 was, of course, less propitious for the opposition than it is today. In 1981, Foot led a deeply divided party which had lurched to the left and from which an important part of its moderate wing had departed to form the Social Democratic party only months before. Hague faced a Labour government with a massive parliamentary majority which remained 20 points ahead of its opponents. Moreover, and as both the Tories in the 1990s and Labour during its later years in power found to their cost, governments die from the grassroots up: councillors frequently form the campaigning core of local parties and their loss, viewed from a purely Westminster perspective, acts as a kind of dry rot undermining the national party. Labour's lack of a local government base in the south, and that of the Tories in the north, is intimately connected to the parties' lack of parliamentary representation in those parts of the country.

Second, while the local election results confirm the slide in the Conservatives' fortunes over recent weeks, underneath the headline figures the story is one of growing distrust of the Tories, but not yet a positive shift towards Labour.

The economy is clearly key both to the Tories' current difficulties and the outcome of the next general election. And, as David Clark, editor of the new Shifting Sands blog has suggested, the debate about it is 'now wide open'. Two-thirds of voters now judge the coalition is managing the economy badly, as against 26% who think it is doing it well. And the number of voters wanting the government to forge ahead with its current deficit reduction strategy, even if it means that growth remains slow, has dropped to 33%, with 41% backing a change of course to concentrate on growth at the expense of slowing the pace of cutting the deficit. Furthermore, the coalition's hitherto successful strategy of shifting the blame for its economic record on to the last Labour government is also showing the first signs of stalling. Asked to pick a reason for the economy going back into recession, nearly one-third of voters opted to lay the responsibility at the door of the government's policies, as against only 17% who blamed the deficit left by Labour.

However, it is important to recognise that Osborne has a potential 'get out of jail free' card in the shape of the 29% of voters who believed the recession was the fault of global economic factors and the eurozone crisis. The coalition also has one further potential trump card in terms of public opinion: the fact that, by a margin of 54% to 27%, the voters still believe the government's spending cuts are necessary. It is these findings which perhaps best explain the sour mood of the electorate: a belief that the government is mishandling the economy combined with a fatalism that there may not be an alternative.

Nonetheless, what is most important about these figures overall is that they indicate waning trust in the government's competence. This is crucial: while parties can - as the Conservatives did repeatedly in the 1980s - win elections when their economic policies are judged by voters to be unfair they cannot, as Labour found to its cost then and John Major discovered after Black Wednesday, win when they are seen as incompetent. Under Tony Blair and Gordon Brown, the emphasis on combining 'economic efficiency and social justice' showed a recognition of this fact and was crucial to the party's hat-trick of election victories.

However, since 2007, when confidence in Labour's economic competence plunged with the onset of the recession, the party has fallen back on attempting to win an argument simply around fairness. The danger of this approach is that, as polling for YouGov after the budget showed, voters may judge Labour has the best policies for making the country fairer, but they continue to believe that the Tories will make the economy stronger and, crucially, by a margin of two to one, they believe this is the more urgent priority.

The continuing lack of faith in Labour's economic competence is shown by the fact that, despite the double-dip recession, the polls indicate that Cameron and Osborne remain, by a margin of 8%, more trusted than Ed Miliband and Ed Balls to run the economy. That lead is only one point less now than it was a year ago. A clue to why this is the case can be seen in the regular party images research conducted by YouGov. One result in particular stands out: when voters are asked which party has 'leaders prepared to take tough and unpopular decisions', the Conservatives beat Labour by 52% to 9%. The Tories' achilles heel is also clear: by 52% to 20%, the party is viewed as 'seeming to appeal to one section of society rather than to the whole country.'

Identifying Labour's problem is not, though, the same as solving it. However, a new report by the centre-right thinktank Policy Exchange offers some clues. Unsurprisingly, it found that Labour's main negative was the view that it 'wastes your money and can't be trusted to run the economy'. When asked what the party could do to convince them otherwise, three populist priorities stood out: control spending on welfare and 'stop people ripping off the benefits system'; pledge to reduce immigration; and cap bankers' salaries. Both the notion of making 'a clear distinction between good and bad businesses' - the theme of Miliband's conference speech last year - and 'apologising for its previous record in government' - the argument advanced by some on the right of the party - trailed far behind on 8% and 14% respectively.

Throughout the 1980s, Labour experienced a series of false dawns in the wake of good local election nights. Those false dawns finally came to an end after 1992 when Labour recognised that only by regaining a reputation for economic competence would it be a viable contender for national office. Despite last night's cheering news, that challenge remains.